Many Reg A+ offerings — a type of crowdfunded securities sale amended in the JOBS Act — don’t make it to the finish line. According to a recent report from the Securities and Exchange Commission’s division of economic risk and analysis, as of the end of 2016 about 56 of the 97 companies that pursued so-called “Reg A+” offerings reported positive proceeds.
Part of the problem has been coming up with the right approaches for attracting non-accredited investors and for sparking the interest of Wall Street brokerage firms. Two years and two months after the effective date of the Reg A+ rules, however, it seems like some businesses are starting to find the right formula.
“Exhibit A” is Chicken Soup for the Soul Entertainment (CSSE), a developer of video content tied to the “Chicken Soup for the Soul” series of books. CSSE’s Regulation A+ offering launched July 17 on the Folio Investing online brokerage platform, and crowd participation was so brisk that initially the systems for selling the shares were overwhelmed, says Bill Rouhana, CEO of CSSE. Potential investors started calling CSSE directly, which the business didn’t have the staff to handle. Then CSSE started giving callers’ names to the brokerage firms participating in its selling group.
“When people tried to go through process of signing up online, they had such a hard time, they started calling, so we slowed everything down and extended the offering two weeks,” Rouhana says. “With the know-your-customer rules, [buying shares] online can get pretty complicated … if you’re not a sophisticated investor you can get very confused.”
As of August 4, CSSE was already well beyond the initial allocation of 900,000 shares. Gross proceeds from the share sale will be in the $10 million to $30 million range.
Rouhana, who launched Winstar Communications in 1993, attributes the success to having “both Wall Street and the crowd working together. I really think that’s how Reg A should be done,” he says.
CSSE videos have a rabid following. “A Reg A+ seemed like it was very much [like] our brand, which is about being inclusive, reaching out to people, and tolerance, respect, and compassion,” Rouhana says.
At the same time, CSSE also enlisted some top-flight firms — HCFP/Capital Markets, The Benchmark Co., and Weild & Co. — to be the deal’s joint bookrunning managers. (Weild & Co. is the firm of David Weild, who has been called the “father” of the JOBS Act.) There are another 10 brokerage firms in the selling group.
Another key, according to Rouhana, is that the CSSE class A common stock will be listed on the Nasdaq Global Market, giving investors liquidity in a secondary market and requiring the company to file quarterly reports. “We’re as public as any company can be,” says Rouhana.
According to CSSE’s IPO filing, the offering’s proceeds will be used to “finance production and development costs for positive video content, as well as to repay existing debt, support strategic acquisitions, including video content distribution companies and video content libraries, and for general corporate purposes.”
CSSE’s business model is to sign up sponsors to produce content. But due to a lack of working capital, CSSE previously needed to get paid by a sponsor upfront before it went into production. Now, with the IPO’s proceeds in hand, CSSE plans to give sponsors more flexibility in how they pay, says Rouhana. “It opens up the world to many more sponsors,” he says.
As to how CSSE shares will do on Nasdaq, Rouhana is optimistic about getting research coverage.
“We’ve educated analysts about the business, and the ones we’ve met with so far seem positively inclined,” he says.